Gold Slips, but Generally Resilient in the Face of Rising Rate Hike Expectations

Gold is maintaining a choppy consolidative tone within the recent range. While heightened Fed rate hike expectations and a firmer dollar are weighing, the yellow metal is actually displaying good resilience.

In the wake of yesterday's stronger than expected U.S. data — and in particular inflation — Fed funds futures are displaying firmer odds for a rate hike: June 17% (up from 4% early yesterday). July 37%. September 52%. November 56%. December 73%.

We've seen these data driven pops in expectations in the past, but they have proven unsustainable as weaker data come in to counteract the firm data. The market seems nonplussed at this point. Despite a marked shift in rate hike expectations the dollar index is only slightly more than 3% off the early-May lows. Yields are on the rise, but really only at the short end of the curve. The U.S. 10-year yield is up only 5 bps over the past month, which leaves it down 41 bps y/y.

It would seem that the bump in CPI inflation that is raising the prospects for a rate hike are also underpinning the gold market. Gold of course is the classic hedge against inflation.

Minutes from the April FOMC meeting will be released later today, and the market will hope to glean some clarity on the Fed's intentions. That's probably unlikely as the global economic picture hasn't material improved in the past month.

You may recall that Fed removed the line expressing their concern about risks from global financial and economic conditions. This past weekend, China reported some weaker than expected data that may in fact reignite those risks . . . if they had ever really dissipated.

And then there is the looming Brexit referendum in the UK. Odds have recently swung more in favor of Britain remaining a member of the EU, but there is still a fair amount of uncertainty and concern out there.